Too Big to Fail = Too Big to Exist
One of Dave Schuler’s favorite statements in recent months is that “Anything too big to fail is too big to exist.” If we’re not going to allow them to shoulder the negative consequences of failure because we deem it too dangerous to society, then their very existence is too dangerous for society. Ezra Klein makes a similar argument with slightly different logic:
The main lesson of all this is that society cannot permit the existence of private institutions that are too large to fail. And that’s not only because they might eventually fail and then we are on the hook for their liabilities. It’s also because the lesson of the bailouts — both the auto and banking bailouts — is that you desperately want to become too big to fail. You get better terms from the government. You’re protected from bankruptcy and insolvency. You have tremendous access to the halls of power. You get a seat at the bargaining table rather than before the bankruptcy judge. Reaching “too big to fail” status is like being kinged in checkers. The rules give you special powers and subsidies. Now that those advantages have been exposed, companies will have much more obvious incentives to chase size. Unless, of course, we stop them.
My only problem with this is that the probability of bad behavior on the part of government is being used to justify government having more power. It’s similar to the argument that we can’t allow private individuals the freedom to smoke cigarettes, ride motorcycles without a helmet, or drive without a seatbelt because, after all, they could get hurt and turn to the welfare state. It makes sense only if you assume a too powerful, too intrusive government.
Frankly, I’d rather just let Bank of America and AIG and others fail and let the chips fall where they may.
Cartoon: Lex Lowther